The overtime deduction: how to figure the part you can actually deduct
Updated November 1, 2026. Written for California owners, workers and freelancers; not legal or tax advice.
Alongside the tips deduction, the 2025 tax law added a deduction for qualified overtime compensation (IRC §225) for 2025–2028. The big misunderstanding: it does not let you deduct all of your overtime pay.
Only the premium counts
Qualified overtime compensation is the part of overtime pay required by section 7 of the Fair Labor Standards Act that exceeds your regular rate. For time-and-a-half, that's the “half.”
Example: your regular rate is $30/hour and you work 10 hours of FLSA overtime at $45/hour.
- Total overtime pay: $450
- Straight-time part: 10 × $30 = $300 (not deductible)
- Premium: 10 × $15 = $150 deductible
Shortcut: if all your overtime is at 1.5×, the premium is one-third of total overtime pay ($450 ÷ 1.5 × 0.5 = $150).
Limits
- Up to $12,500 per return, or $25,000 on a joint return
- Same phase-out as tips: $100 less for each full $1,000 of MAGI over $150,000 ($300,000 joint)
- SSN valid for employment required. Married filers must file jointly. You don't have to itemize
The California catch
The FLSA requires overtime only for hours over 40 in a workweek, and only for non-exempt employees. California law goes further: daily overtime after 8 hours, double time after 12, and seventh-day rules. Only overtime the federal FLSA requires counts. Overtime you get only because of California law or a union contract does not.
Example: a nurse works three 12-hour shifts (36 hours) in a week. California requires 4 hours of daily overtime per shift, 12 hours in total. The FLSA requires none, because she didn't exceed 40 hours. Her deductible premium for that week is $0.
Double time paid under the FLSA? The deductible part is still only the FLSA-required half-time premium. The extra beyond 1.5× isn't required by the FLSA.
Where to find the number
For 2026, employers report qualified overtime on Form W-2 box 12, code TT. Check that figure against your pay stubs. Keep stubs showing hours, regular rate and overtime rate, so you or your preparer can support the number if the W-2 is wrong or missing it.
Is it worth tracking?
For someone in the 22% bracket with $6,000 of FLSA premium, the deduction saves about $1,320 in federal income tax. It doesn't reduce Social Security, Medicare or California tax.
Convert total overtime to the deductible premium in our free calculator →
The New Deductions Workbook has a paycheck-by-paycheck overtime splitter that separates FLSA overtime from California-only overtime.